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Is a Credit Card the Best Way to Consolidate Debt?

Balance Transfer Credit Cards, Credit Cards, Personal Loans
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The Best Way to Consolidate Your Debt

Whether a credit card is the best way to consolidate debt depends on how much debt you have, your credit score and even your personality.

If you can pay off your debt relatively quickly, and your credit is good enough, then a balance transfer credit card may be your best choice. If you might need help staying on track or if you’ll require more time, then a personal loan with fixed payments may be a better approach.

With a balance-transfer credit card, you move high-interest debt to a card with a 0% introductory interest rate. Once that 0% period ends, interest rates can be quite high, so it’s best to use the card only if you can pay off the balance within the introductory time.

With a personal loan, you borrow a sum of money to pay off debts. The interest rate you qualify for is determined by your credit score, credit history and the ratio of your debts to your income. Ideally, the rate should be lower than the one for your existing debt.

Nerd tip

Balance transfer credit cards and debt consolidations loans are designed for people who are looking to save money while paying off their debt. If your debt is so severe that you’re just treading water and can’t realistically expect to pay it off, you may need to look into other options for debt relief.

Which approach is right for you? Start with our brief quiz:

If you want a balance-transfer credit card

A balance-transfer credit card can be a powerful weapon against high-interest debt. Look for a card with no balance transfer fee, or an introductory period long enough that the money you save on interest makes up for the fee. The introductory period should also be long enough to cover your debt-elimination timeline.

The balance-transfer card you choose should have no annual fee. Not only will that free up more money to put toward eliminating debt, but it will also allow you to keep the card open at no cost after the balance is paid off. Keeping an older credit card account open can help your credit score.

Here are a couple of our favorite balance transfer cards. Neither has an annual fee, and both have 0% balance transfer APR periods of longer than a year.


Citi Simplicity® Card - No Late Fees Ever

Citi Simplicity® Card - No Late Fees Ever

Apply Now on Citibank's secure site
  • Recommended Credit Score
  • 690
    850
    Good - Excellent
  • Card Details
  • Pros

    • No late fee
    • No annual fee
    • 0% on Purchases and Balance Transfers for 21 months

    Cons

    • No rewards

    Annual Fees

    $0

    APR

    • APR: 14.99% - 24.99% Variable APR

    Bonus Offers

    None

    Intro APR

    • 0% on Purchases and Balance Transfers for 21 months
  • Additional Information
    • The ONLY card with No Late Fees, No Penalty Rate, and No Annual Fee…EVER
    • 0% Intro APR on Balance Transfers and Purchases for 21 months. After that, the variable APR will be 14.99% - 24.99% based on your creditworthiness*
    • There is a balance transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater
    • The same great rate for all balances, after the introductory period
    • Save time when you call with fast, personal help, 24 hours a day – just say “representative”
    • Enjoy the convenience of setting up your own bill payment schedule on any available due date throughout the month

The Citi Simplicity® Card - No Late Fees Ever charges a 3% balance transfer fee, but it gives you a longer 0% interest rate period than most cards. There is no fee or penalty APR for late payments, but you’ll want to pay on time to avoid damaging your credit.


Discover it® - 18 Month Balance Transfer Offer

Discover it® - 18 Month Balance Transfer Offer

Apply Now on Discover's secure site
  • Recommended Credit Score
  • 690
    850
    Good - Excellent
  • Card Details
  • Pros

    • Bonus cash back categories
    • No annual fee
    • 0% on Purchases for 6 months and 0% on Balance Transfers for 18 months
    • No foreign transaction fee

    Cons

    • Slightly less merchant acceptance for Discover in US - acceptance outside of US can be an issue
    • If you value simplicity, a flat rate cash back card may be better

    Annual Fees

    $0

    APR

    • APR: 11.99% - 23.99% Variable APR
    • Cash Advance APR: 25.99%, Variable

    Bonus Offers

    Discover will match ALL the cash back earned at the end of your first year, automatically.

    Intro APR

    • 0% on Purchases for 6 months and 0% on Balance Transfers for 18 months
  • Additional Information
    • INTRO OFFER: Discover will match ALL the cash back earned at the end of your first year, automatically.
    • Earn 5% cash back at Amazon.com and Target now through December 2017, on up to $1,500 in purchases when you activate. Plus, 1% cash back on all other purchases.
    • Redeem your cash back for any amount, any time. Cash rewards never expire.
    • 100% U.S. based customer service.
    • Get your free Credit Scorecard with your FICO® Credit Score, number of recent inquiries and more.
    • New! Receive FREE Social Security number alerts-Discover will monitor thousands of risky websites when you sign up.
    • No annual fee.
    • Click "APPLY NOW" to see rates, rewards, FICO® Credit Score terms, Cashback Match™ details & other information.

The Discover it® - 18 Month Balance Transfer Offer is a good choice if you want a card that provides value beyond balance transfers. It charges a 3% transfer fee, but it’s also an excellent rewards credit card. It pays 5% cash back in quarterly bonus categories that you activate, on up to $1,500 in spending per quarter. Other purchases earn 1% cash back.

If you want a personal loan

Personal loans come in many shapes and sizes, depending on the lender you choose. Interest rates for personal loans are typically lower than those for credit cards (unless you’re able to snag a 0% introductory offer).

Your local credit union is a good first stop for a personal loan, as credit unions typically offer some of the lowest rates available. The maximum APR at a federal credit union is 18% and most are willing to lend to those with low credit scores.

Online lenders may have slightly higher rates depending on your credit score, but they have their own advantages: You can easily check your estimated rate and monthly payment with a soft credit check, which not all credit unions allow. Some lenders offer features that help you stay disciplined as you try to pay off debt.

Most lenders charge an upfront fee — known as an origination fee — that can range from 1% to 6% of the amount you borrow, so factor that into your loan request.

Here are a few online lenders we particularly like:

  • Discover and FreedomPlus both give you the option to pay off your creditors directly; not all lenders do. Discover doesn’t charge an origination fee, and FreedomPlus gives you a rate discount for using the direct-pay feature.
  • Payoff, a good-credit lender, gives you personalized advice and periodic nudges to help you stay on track.

Each lender has its own approval procedure, and that means rates can vary quite a bit even for the same borrower. NerdWallet’s loan pre-qualification tool allows you to compare actual offers from multiple lenders without affecting your credit score.


See if you qualify for a loan

  • Get exact rates from 10+ partners
  • Won't affect your credit score
  • Fast and free

Your choices in a nutshell

Generally, you will need good to excellent credit to snare a no-annual-fee credit card with a 0% interest offer for balance transfers. This route is most viable if you need $15,000 or less to consolidate your debts and if you will be able to repay the balance in 21 months or less. Keep in mind that using a high portion of the available credit on a card could hurt your credit.

Personal loans offer longer repayment terms, higher borrowing amounts and typically have lower rates than credit cards, unless you qualify for a 0% balance transfer offer. If you use a personal loan to consolidate credit card debt, it may improve your credit by reducing your card balances. Personal loans are treated as installment loans on your credit report, rather than revolving credit, as credit cards are.

Amrita Jayakumar and Virginia C. McGuire are staff writers at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com or virginia@nerdwallet.com. Twitter: @ajbombay or @vcmcguire.